When a lawsuit alleges that a Washington corporate director violated a duty of care to the corporation, three conditions must be met to uphold the director’s decision. This legal doctrine, called the business judgment rule, helps protect members of a corporation’s Board of Directors from liability due to frivolous lawsuits regarding its business practices.
To challenge a director’s actions, a plaintiff must provide evidence that the directors have breached their fiduciary duty of good faith, due care, or loyalty. The business judgment rule protects directors’ decisions unless they breach one of these duties.
Business decisions made in good faith are those in which corporate directors have made decisions based on fair dealing standards with no fraudulent intent. Corporate directors can’t guarantee business success, which causes some of their decisions to fall under scrutiny and become subject to business litigation. Making decisions in good faith means the directors had genuine, honest and fair intentions regarding the corporation when they made the business decision.
Making decisions for the corporation’s sake requires a director to act with a duty of care. The director must show good judgment regarding business decisions and use an ordinary level of care and prudence in running the business. The director’s obligation to exercise a duty of care is often implied but may also be part of an employment or other written contract.
Directors are expected to be loyal to the corporation and act in the corporate entity’s and its shareholders’ best interests. The evidence in a business lawsuit must show that the director had reasonable belief that they were acting in the corporation’s best interests.
The duty of loyalty differs from the duty of care in that it requires a director to put the corporation’s interests ahead of their own. For example, taking advantage of opportunities and information or diverting corporate assets for personal gain breaches the director’s duty of loyalty.
Although shareholders may not always agree with a corporate board’s directives and decisions, the business judgment rule offers protection as long as directors heed the three fiduciary standards.